Service or insurance contract?

Some contracts meet the definition of an insurance contract but their primary purpose is to provide services for a fixed fee. An entity issuing such contracts may choose to apply IFRS 15 to them if, and only if all of the following conditions are met:

Identification of Fixed fee contracts for services:

All of the following three conditions apply to a fixed fee contract for services:

Non-risk-specific price

Setting the price for an individual customer does not reflect the entity’s assessment of the risk specific to that customer

YES

Compensation by service not cash

Cash payments are not made to customers

YES

Use, not cost, drives Insurance risk

The risk transferred by the contract arises primarily from the frequency of use of the service but not from the uncertainty around its cost to the customer

YES

 

NO

YES

Use IFRS 17

Choose between IFRS 17 and IFRS 15

Choice is contract by contract

 

Examples of insurance contracts

Examples of items, which are not insurance contracts

  • Insurance against theft or damage
  • Liability insurance (product, professional, civil, legal expenses)
  • Life insurance and prepaid funeral plans
  • Life contingent annuities and pensions (including those linked to a cost of living index)
  • Insurance against disability and medical cost
  • Surety bonds, fidelity bonds, performance bonds, bid bonds
  • Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer
  • Title insurance
  • Travel insurance
  • Catastrophe bonds if a specified event adversely affects the issuer and creates significant insurance risk
  • Insurance swaps for variables specific to a party to the contract
  • Investment contracts with a legal form of an insurance contract but do not transfer significant insurance risk
  • Financial reinsurance (return the insurance risk to the policyholder by non-cancellable adjustments of future policyholder payments based on insured losses)
  • Self-insurance1
  • Gambling contracts (do not have as a contractual precondition for payment that an event adversely affects the policyholder)
  • Catastrophe bonds, financial or weather derivatives with variables not specific to a party to the contract
  • Credit related guarantees that require a payment even if the holder has not incurred a loss on the failure of a debtor

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